First Advantage Corp Q2 FY2025 Earnings Call

Good day, everyone. My name is Nikki, and I will be your conference operator today. I would like to welcome you to the First Advantage Second Quarter 2025 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. Please note, today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, Nikki. Good morning, everyone, and welcome to First Advantage's Second Quarter 2025 Earnings Conference Call. In the Investors section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2024 Form 10-K and our Form 10-Q for the second quarter of 2025 to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website. To facilitate comparability, we will also discuss pro forma combined company results, consisting of First Advantage and Sterling Check Corp. historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January 1, 2023. The pro forma information does not constitute Article 11 pro forma information. I'm joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. We have 4 key messages for today. First, we delivered solid results in the second quarter at the upper end of our expectations. Our revenue performance was supported by the strength of our sales engine and increased scale. We also continue to see the positive impacts of our accelerated synergy realization efforts. This is evident in our Q2 adjusted EBITDA margins of over 29% as well as in our nearly 30% year-over-year adjusted diluted EPS growth. Second, we are continuing to successfully deliver on our post-close priorities and are ahead of schedule on the integration of our $2.2 billion Sterling acquisition. This includes a consistent emphasis on our products and customers while continuing the integration process, focusing on customer retention, actioning synergies and reducing net leverage. Third, we are executing on our FA 5.0 strategy with a focus on delivering results across 3 core elements: increasing share in our target verticals, accelerating our international growth and actioning our best-in-breed product and platform strategy to accelerate upsell and cross-sell. We are driving results while maintaining our relentless focus on cost discipline and carefully navigating the current uncertain macro environment. And fourth, today, we are reaffirming our full year guidance, which Steven will cover in more detail shortly. Now turning to Slide 5 and a closer look at our results in the second quarter. We were very pleased with both our top and bottom line second quarter results, reinforcing our conviction in our resilient business model. For Q2, combined upsell, cross-sell and new logo rates continued to perform in line with our long-term growth algorithm targets. Retention remained high at over 96%, consistent with our past results, demonstrating our team's strong customer-centric focus. We saw sequential improvement from the first quarter, in line with our expectations, all of this against an ever-changing macro backdrop. In Q2, 2 of the 3 large deals we discussed on previous earnings calls went live and started generating revenue. As a reminder, these 2 deals include one with a significant retail customer in the retail gig economy and one in Australia, representing our largest international contract in recent years. We expect the third deal, which is a large healthcare deal, to go live in the near future. This success is further supported by our 18 enterprise bookings in the second quarter and 78 in the last 12 months, each with $500,000 or more of expected annual contract value. This gives us confidence in our ability to generate new logo and upsell/cross-sell revenue and is an encouraging sign of our sustained go-to-market momentum since closing the Sterling acquisition. Looking at our verticals, during the second quarter, we saw continued overall strength in our transportation vertical. Despite experiencing some macro-related slowing in base volumes, transportation was still able to generate positive growth by leveraging our upsell and cross-sell initiatives. The retail and e-commerce industry continued to see a decline in order volumes, driven by the impacts of tariffs on U.S. consumers and how our customers in that vertical are positioning their hiring plans. Hiring momentum in healthcare tapered a bit, but we remain bullish on the industry overall. Most of our other verticals showed positive overall growth in Q2, partially powered by our success in our new logo and upsell/cross-sell programs. Internationally, we are seeing good momentum and continued growth in our targeted geographies, including Australia and the U.K. We also continue to see strong customer interest in our Digital Identity solutions. In fact, in conversations with customers, we often spend about half of our time addressing the increasing challenge of identity fraud risk in the employment life cycle. Our powerful competitive differentiator is indicative of the direction in which our industry is moving. When combined with our broad suite of services, we can offer an end-to-end background and digital identity solution covering multiple parts of the recruitment, hiring and onboarding processes, creating a competitive advantage for First Advantage. Overall, as an early market leader with Digital Identity solutions, we are able to deepen our strategic dialogue with customers, strengthening our relationships and the stickiness of our products. Looking at the macro environment, we have continued to see some of the macro indicators around hiring volumes normalize versus last year. There is a consistent and notable tone of uncertainty as policy changes, including immigration, tariffs and tax policy continue to cause our customers to reconsider their business strategies, resulting in many of them remaining in a wait-and-see posture regarding their hiring plans. Given the evolving macro backdrop, we have updated our second half base growth expectations to be slightly negative instead of modestly positive as we previously expected. Despite this base forecast, today, we are reaffirming our guidance. We feel confident in our business's ability to weather a variety of macroeconomic scenarios based on our diverse range of global verticals and customer segments. Our mix of hourly and salary-focused customers, our diligent focus on managing the controllables and our ability to generate upsell and cross-sell revenues as the base revenues stabilize. Turning to Slide 6. We remain laser-focused on our post-close strategic priorities. We continue to successfully execute our integration plans and provide a seamless experience for our customers. We are leveraging the best-of-breed product platform solutions from both First Advantage and Sterling and increasing back-end automation. Our customers continue to be excited about the benefits of this approach and the resulting products, data and AI-enabled technologies that are or will be available to them as a result of the acquisition. In May, we extended First Advantage's award-winning CLICK, CHAT, CALL customer care solution to those First Advantage customers that came over from the Sterling acquisition. We likewise made available the higher-margin First Advantage Work Opportunity Tax Credit product. These are examples of our best-in-breed product and platform strategy coming to life, which enables better customer experiences and incremental upsell, cross-sell growth opportunities. We are staying closely connected with our customers, and through our global Collaborate customer user conferences, we have been able to deepen our strong relationships and enable more frequent opportunities for engagement. Following our successful April Collaborate user conference in the U.S., we held regional events in India and Singapore in June and July, with EMEA, Hong Kong and Australia events planned for this fall. Through these user conferences, we have hosted and met with hundreds of customers and prospects, giving us greater visibility into our global markets and increasing our confidence in the opportunities ahead. And finally, in May, based on our strong progress, we targeted a range of $65 million to $80 million. We are executing well on this plan, and Steven will provide more details shortly. Turning to Slide 7. I want to thank everyone who joined us for our inaugural Investor Day on May 28. We hope it enhanced your understanding of the First Advantage story and our strategy for delivering long-term shareholder value. I would like to reinforce the key messages we were proud to highlight during our Investor Day. First Advantage is a category-leading technology company. We deliver global software and data through our proprietary platform in an attractive, large and growing HR tech market. Our industry total addressable market (TAM) is over $24 billion, and we are well positioned to continue to capture growth among existing and new customers. Digital Identity alone represents $10 billion of that TAM and is growing faster than the traditional background screening market. Additionally, we are widening our competitive advantage with our best-in-breed product and platform approach, our proprietary data and the capabilities added through our acquisition of Sterling. We are executing our FA 5.0 strategy with differentiated solutions, strengthened by our investment in AI and automation, our verticalized go-to-market approach, and our focused approach to international growth. We are also building on our strong financial track record and are committed to achieving our long-term 4-year financial targets. We are well positioned to accelerate margin expansion and adjusted diluted EPS growth through our acquisition synergies and have already made substantial progress on actioning and realizing these synergy opportunities. Additionally, we are proactively managing our debt. In July, we repriced our credit facility to reduce future interest expense. Then in August, we made another voluntary principal debt repayment, showcasing our commitment to reaching our target net leverage range. For anyone who wasn't able to join us, I would encourage you to review our presentation and webcast from the event available on our Investor Relations website. With that, I now turn the call over to Steven.

Thank you, Scott, and good morning, everyone. Today, I'll provide color on our Q2 results, our synergy progress, our deleveraging trends and our reaffirmed 2025 guidance. Starting with second quarter results on Slide 9. Our second quarter revenues came in at the top end of our previously stated expectations at $391 million, up 1.5% versus the last year on a pro forma basis. In Q2, the trends in our base performance continued to moderate, remaining negative on a year-on-year basis, but on par with how we had forecasted the quarter. Our go-to-market success was in line with our long-term growth algorithm targets, with the combined contribution of new logo and upsell/cross-sell revenues delivering 9% growth in the quarter, and our retention remained at its high level of over 96%. Adjusted EBITDA for the second quarter was $114 million with an adjusted EBITDA margin of 29.2%, an improvement of 270 basis points versus the prior year on a pro forma basis. These results were enabled by our continued focus on accelerating synergies, our disciplined approach to cost management, and the scalable nature of our business. As part of the integration process, we are applying best-of-breed fulfillment execution, which is bringing the combined company's operating margins in line with our historical expectations of our business. Adjusted diluted EPS was $0.27, a 29% increase year-over-year, and well ahead of our expectations. The benefits of our greater scale, expense and capital management, and lowered interest expense as a result of our voluntary debt payment in May have allowed us to realize enhanced flow-through of profitability to our per share earnings and more than offset the impact of the incremental interest on the transaction financing and the dilutive impact of the new shares issued for the Sterling acquisition. On Slide 10, you can see how we are making great progress on our synergy program. During our Investor Day in May, we announced an increased synergy target range, now targeting $65 million to $80 million within 2 years, of which we have actioned a total of $47 million as of Q2. Additionally, we realized approximately $10 million of the synergies in the second quarter, bringing our in-year realization to $18 million. We are pleased to see the results of our integration and synergy execution come to fruition so quickly. And now moving to Slide 11, you can see our historical revenue growth algorithm results with combined company data beginning in 2025. As Scott mentioned, in the second quarter, our results were driven by strong upsell, cross-sell as well as new logos, supported by consistently solid retention. Base results came in as expected, with sequential improvement from Q1 despite remaining negative overall for Q2. Turning to cash flow, net leverage and debt payment progress on Slide 12. During the quarter, we generated adjusted operating cash flows of nearly $48 million, an increase of $7 million or 17% on a year-over-year basis, driven by the larger scale of our business, our tight management of our working capital, and our focus on cash flow. Our cash balance at June 30 was $184 million. With this ample liquidity and cash flow, subsequent to the end of the quarter in August, we made another voluntary principal debt repayment of $25 million, bringing our total year-to-date principal payments to over $45 million, of which $40 million has been voluntary using excess cash flow. Additionally, in July, as a result of our strong performance in synergy capture and cash flow, as well as a favorable rate environment, we were recently able to reprice our debt and reduce the borrowing rate on our credit facility by 50 basis points. Our synergized pro forma adjusted EBITDA net leverage ratio at quarter end was 4.3x. We remain focused on reducing our net leverage towards approximately 3x synergized pro forma adjusted EBITDA within 24 months post-close, and our long-term net leverage target remains 2x to 3x. These actions demonstrate our capital allocation playbook coming to life and our commitment to swiftly reduce debt and take advantage of capital market opportunities as they arise. Now moving to Slide 13 and our 2025 guidance. As a reminder, year-on-year comparisons are on a pro forma basis to allow for easier comparability. Today, as we have mentioned, we are reaffirming our full year guidance. We are in the first half of the year and feel more confident in the middle of our full year revenue guidance range. Our revenue outlook for the remainder of the year continues to assume a certain degree of macro stability while keeping in mind that our customers remain in a wait-and-see mode as many factors, including increased tariffs and other policies, remain key areas of uncertainty across the global economy. Given this evolving macro backdrop, we have updated our Q3 and Q4 base performance expectations to now be slightly negative instead of modestly positive as we had previously expected. We do, however, anticipate continued productivity of upsell and cross-sell and new logo growth consistent with historical trends, and our robust deal pipeline supports our expectations for the remainder of the year. Additionally, we also expect customer retention to remain in line with our historical performance of 96%. FX has also become a lesser factor as the year has progressed. Even with this more muted base expectation for the second half of the year, based on our first half profitability performance, strong synergy execution, and continued focus on efficiency, we expect to achieve full year adjusted EBITDA margins of 28%, a meaningful expansion from 2024. This positions our expected full year adjusted EBITDA and adjusted diluted EPS results at or slightly better than the midpoint of our guidance range. Looking at our quarterly phasing, in the second half, we will begin to lap somewhat easier comps as we anticipate sequential year-over-year revenue growth improvement from Q2 to Q3, with fourth-quarter growth rate about on par with or slightly ahead of the third. Of note, the revenue trends we saw in July were on par with the overall trends we saw in Q2 and give us confidence in our expectations for the third quarter. For the third and fourth quarter, we now expect to achieve adjusted EBITDA margins of 28% or slightly above. We also anticipate that the adjusted diluted EPS momentum from Q2 will continue for the second half as revenue ramps and synergies are more fully realized. With our more balanced post-acquisition seasonality, we expect that quarterly adjusted diluted EPS will remain in the mid- to high $0.20 range in each of the final 2 quarters of the year, consistent with our strong Q2 trend. While the passing of the OBBBA tax law in July will not notably impact our effective tax rate, we will be able to utilize certain provisions within the new law to significantly reduce our 2025 required cash tax payments. We now anticipate meaningfully higher free cash flow for the year of $90 million to $120 million, a $25 million increase from our previous commentary. Keep in mind that embedded in our free cash flow assumptions are: one, our efforts to actively manage and minimize one-time costs related to synergy achievement; two, the payout of deferred transaction proceeds tied to equity vesting; and three, our assumption for required working capital based on our revenue guidance and integration status. We have provided a full chart in the appendix to the earnings presentation with FX, CapEx, interest, and other modeling assumptions. And with that, let me turn the call back to Scott for closing remarks before we open the line for your questions.

Thank you, Steven. In closing, I would like to reemphasize First Advantage's position as an investment of choice. We are a market leader, offering proprietary technology and data in a large and growing market. We have significant organic revenue growth potential accelerated by the Sterling acquisition. We are resilient with a flexible cost structure and high revenue diversity that comes from our balanced vertical strategy. We have industry-leading operating margins, leading to strong and consistent free cash flow generation. And we have a track record of value-accretive capital deployment and balance sheet management. All of this supports our confidence in our ability to achieve consistently strong results, including delivering on the 4-year financial targets we established during our Investor Day. As I wrap up the call, I want to thank the entire First Advantage team for their hard work and consistent dedication to serving our customers. With that, we will open the line for questions.

Our first question is coming from Ashish Sabadra with RBC Capital Markets.

So the change in the base growth assumption for the second half indicates a modest decline. Is this decline widespread across all sectors, or is it primarily concentrated in retail and e-commerce due to tariff and policy uncertainties? Any additional insight on this would be appreciated.

Yes, Ashish, the situation is more broad-based. As Scott and I indicated, the ongoing changes in tariffs and immigration policies have created an overall sense of uncertainty. This is not confined to any specific industry. Initially, we anticipated modest positive growth, but now we expect it to be essentially flat for the second half of the year. Based on what we're currently hearing, we are slightly adjusting our outlook downward, but this is not specifically tied to any one industry; it reflects the general market sentiment.

That's very helpful color. And I was just wondering, have you heard from your clients anything on the GenAI front? Have they pulled back on the hiring or slowed down on the hiring because of the GenAI initiative? So any color on that front will be helpful.

Yes, Ashish. We're just hearing a consistent message from our customers. It's not specific to anything. It's, again, as Steven said, a lot of wait and see. I think you hear this across all industries and all companies that it's a wait and see as to what's going to happen in Washington with policy. It's not specifically tied to anything specific. It's more of just a general response. But in general, our customers are actually cautiously optimistic with their view of the macro. And the wait and see is more of a Washington policy byproduct versus anything specific.

On the GenAI front, we are observing that customers are still in the process of determining how they plan to use it. In some cases, it has influenced their hiring practices and locations, enabling them to save in certain areas while making investments in others. However, it seems to be too early to identify a broader macro trend emerging from this.

Our next question comes from Shlomo Rosenbaum with Stifel.

I would like to explore the different verticals a bit more. You mentioned transportation and retail, but could you elaborate on other areas, particularly staffing, since it's often a leading vertical? Additionally, are there any other sectors where you identified significant opportunities or challenges?

I think a couple of points here, Shlomo. As we've mentioned in the past maybe 2 quarters or so, we really have seen an overall narrowing across our verticals of the swings in terms of positives and negatives. So when we're talking about positives, there's not really any double-digit positives and not any double-digit negatives. So everyone has kind of moved into a tighter range. Staffing definitely held its own in the quarter. Financial services also did well. We mentioned healthcare, a slight tick down, but we're not too concerned about that. I just think it's a little bit of a blip. It's such a strong vertical. With the aging demographics in the U.S., it will continue to perform well in our view. So no real big swings and no real callouts in the verticals. But I think maybe a little more color on transportation would be helpful because that's one of the areas you'd think would be slightly affected by lower retail or tariffs or whatever it might be. But I think it's important to note that we have over a dozen products in the transportation space. Some of those products are completely resilient to the macros because they deal more with the actual truck and not the driver. So we're doing things like handling registration and title. We're doing the gas tax submissions to the federal government. We're doing a lot of compliance-related tasks on both the driver and the truck, which aren't actually tied to new hiring. So that's why transportation has just held up so beautifully for us over the past couple of years. But other than that, no real major callouts on the verticals.

Okay. And then just piggybacking a little bit more off of what Ashish was talking about, did the quarter in general play out? In other words, the hesitation or what you're expecting from the wait and see, did that change in the quarter? Or is that like subsequent to quarter end? I'm just trying to understand the quarter seemed to be pretty good. And is it just, hey, we're looking at it, looking around and saying, given the uncertainty, we just want to kind of temper the back half? Or is there anything within the clients' own actions that you're seeing that kind of warrants that? I guess, is it client-driven? Or are you just trying to get ahead of that?

So I wouldn't say it's action-driven. I'd say it's client conversation-driven. We haven't seen any clients do anything specific here, it's more of the conversations with clients being cautious about their back half. The quarter panned out better than we thought. The order volumes just came along sort of consistent and nice throughout the quarters. It's also important to call out and note that July also did very well. So instead of 6 months of strong data, now we have 7 months of strong data. We are being a little cautious maybe on the back half. But again, the wildcard is less to do with our customers, our products, and our services and our company and probably more to do with Washington policy.

Our next question comes from Andrew Nicholas with William Blair.

I wanted to ask on international growth. You mentioned in your release and in your prepared remarks that you're seeing momentum there. Any metrics you could provide in terms of growth there? I know in your Q, you disclosed kind of the legacy businesses' international growth, but would love to hear a little bit more about that. And somewhat relatedly, is there a difference in kind of the underlying growth algorithm in international right now compared to the Americas? Are you seeing better works base growth there, better new logo growth? Any more color would be great.

Yes. I'll let Steven cover the algorithm part of that question, and I'll just give you a broad view. We're obviously very happy with what's going on with international. It was up 7.2% in the quarter. And I think if you remember going back over 2 years ago, international was really the first region to take a dip and has come back really nicely over the last couple of quarters. This is now 3 or 4 quarters of really good growth internationally. There are a couple of things driving that. One is we're seeing the region stabilize and grow again. Customers are hiring in the region. Two, a couple of years ago, we changed our go-to-market strategy in international and diversified by going after more of the high-volume hires. And they have helped diversify that region in terms of a vertical strategy. We've had some new logo big wins, and they're now live and contributing to the revenue. I'll have Steven give you a little more detail on the algorithm. But overall, the region has done well from regional diversity, a vertical diversity, and obviously, the sales engine is working.

Yes, everything Scott is saying is reflected in the numbers. In fact, in this quarter and the second quarter, our international segments outperformed our Americas across every line item of our growth strategy. As Scott mentioned, there is significant momentum in our go-to-market efforts, particularly in acquiring new logos and upselling and cross-selling based on our vertical strategy. Base performed very well internationally in the second quarter, with EMEA and the U.K. market showing particularly strong results. Some of this stability likely stems from pent-up demand due to the resolution of several London policy issues in recent months. Additionally, while foreign exchange rates stabilized, they didn't improve significantly, presenting a minor headwind of less than 10 basis points in the quarter. Overall, performance was quite strong.

Great. That's helpful. And then for my follow-up, I wanted to ask on upsell, cross-sell. So another consistent quarter there. Within that 5% figure, is there any way for us to think about how much the Sterling and First Advantage cross-sell is contributing? I don't know if that's something that you can track or not. I'm just curious if you're seeing early revenue synergies in that line or if that's something that we would expect in the out years?

Yes, Andrew, we really don't track it that way. I think it's also a little early. Like Scott mentioned in his remarks, one of our big recent milestones is now some of the back-end platform work our product and tech teams are doing, where now we're able to offer WOTC services, which was something traditionally only available on the FA platform, on all platforms. We can go out and cross-sell that. We've mentioned a couple of the other products that will come online on that same availability. So I think as more of that comes around, you'll start to see some of that potential kind of incremental, but it just reinforces our long-term confidence in the growth algorithm. What you're seeing come through now is the fruits of the labor of the teams for the last 12 or 18 months of just building a strong pipeline and executing on it.

Andrew, I would think a lot of the revenue synergies are more of a 2026 outcome because our initial focus from a product and platform strategy was to deliver things that would improve the experience, and that covers a lot of different things. For example, we rolled out CLICK, CHAT, CALL to the Sterling installed base in May. With WOTC, we do have a potential revenue synergy there. But a lot of the back-end stuff we've been working on is just making turnaround times faster by bringing the First Advantage automation to the Sterling back end and taking some of the best-in-breed from the Sterling platform to the First Advantage platform. This is improving the candidate experience for both sets of customers and improving the performance from a turnaround time and quality standpoint. This was primarily the goal of 2025, and it's really 2026 where we'll start to see more of the revenue synergies.

Our next question comes from Andrew Steinerman with JPMorgan.

Okay. I have two quick questions. When you mention that July's trends were consistent with the overall second quarter, does that refer to base revenue or total organic revenue growth? Also, regarding the slide about achieving net leverage targets of 3 times or less, does this take into account any voluntary prepayment or exclude it? Additionally, when might there be opportunities for voluntary prepayments?

Andrew, great question. So I think the July trends, you're probably right on both regards. I think we're seeing the continued trend of that base normalization occur. We're also, at that same time, still hitting on upsell, cross-sell, still hitting on new logo, still having strong retention. So it's just a real continuation and evolution of that trend. If you recall, base really turned negative on both companies back in the second half of 2022. So you get a little easier comp to go with it. You're seeing that normalization trend, the continued success of the controllable go-to-market, and just that easier comp. So it's starting to evolve a little bit how we assumed it would. As Scott mentioned a couple of questions ago, it's always good to see that month come through the data and have one less month of risk to carry. On the net leverage comment, I think we talked about a little bit at the Investor Day in May. We would expect to continue to take some of our excess cash flow each quarter and make voluntary prepayments. As I mentioned, the new tax law will help bolster our free cash flow in the second half of the year. That only passed July 4. This will impact our future federal tax payments. We will have a little bit more cash on hand as we get into Q3 and Q4. I'd expect to make roughly a quarterly debt prepayment as we reach those quarter ends.

Our next question comes from Manav with Barclays.

This is Ronan Kennedy on for Manav. If I may, Scott, I have a 2-part question on labor market data. I think we understand that JOLTS and more specifically churn have been the leading indicator, but cognizant of some potentially diminishing correlation. So JOLTS estimates for June, they declined relative to May, I think, as did weakened hiring separation data or rates rather. So the first question on JOLTS is, does this reconcile to what you've been seeing? And then the second part of the question, I think the July jobs report was set to flip labor market script to show that hiring has been cooling faster than accelerating. I think also outside of COVID, it was the largest 2-month downward revision since 1990, which included 3 recessions. How does this correlate? And how should we expect it to correlate if there is a further weakening in the labor market? And contemplation of what you're considering for 2H outlook?

Yes. First of all, I'd say, the BLS and JOLTS data is a data point. It's not an exact correlation. So no, we did not see a correlation between our order volumes and the BLS data. If we bubble it up to a higher level, BLS is basically a little bit too late of a data point for us to understand what the trends are. We focus on our order volumes and customer conversations. We tend to see a very good correlation between BLS, JOLTS data and SMB. We've seen this pan out over the last year or 2; our SMB business tends to correlate fairly directly to BLS data. But keep in mind that SMB is only 6% of our revenue. One of the great resiliency stories of First Advantage is our focus on enterprise. That's why we're always happy to announce enterprise wins over the quarter and the last 12 months because, to us, that's a better indicator. BLS data is experiencing some issues. The response rates for BLS data have come down dramatically over the last couple of years, so it's not as reliable as it used to be. But again, I see it as one of the only government data points out there. I would say think of it as a data point; we would rather run our business on actual order volumes and conversations with customers.

Got it. And then with the revision of base performance for 2H, to slightly negative or modestly positive. I think with the expectation for continued productivity on upsell and cross-sell and new supported by the pipeline, and I would imagine the 18 enterprise bookings and retention in line. Is there some element of overperformance expected in those given that the guide was maintained and the confidence in the midpoint?

I'll step in. Yes, I think it's important to remember that we have those two and three large deals that Scott mentioned, which will help us slightly when we consider the historical performance. You're correct that if we do the math, that's around 4.5% growth, while our base is just slightly negative. We're seeing the usual contribution from upsell and cross-sell, and it might be a bit higher than it has been in recent quarters due to the two large deals coming online, but we're still retaining clients at over 96%, so it's not too far off.

Yes. One of the strategic initiatives that we've been focused on for the last year or 2 is how to improve onboarding and accelerate that revenue faster. We're seeing that with these 2 deals that we talked about from Q1; they were actually onboarded sooner than we thought and are accelerating revenue more than we thought. We're being a little cautious about the back end as we can't control what's going on in Washington.

Our next question comes from Kyle Peterson with Needham.

Great. I want to start off with a modeling question, particularly on interest. I noticed you guys lowered that a bit in the modeling considerations. My main question is, does the updated outlook fully account for the repricing on the credit facility as well as the voluntary prepayment? And do you have any rate cuts included in that outlook as well?

Yes, Kyle, regarding the updates, there are a couple of key points. First, we made a voluntary payment after issuing our last guidance, so we adjusted for that. Additionally, we experienced a 50 basis points decrease in the rate due to the reprice, which only reflects the past five months since it occurred last week. We also factored in the $25 million we prepaid last week. As for the rate environment, our internal model suggests it will remain stable throughout the year. We've incorporated one 25 basis points cut, projected for December, into our model. There are many perspectives on this matter, and it can be unpredictable, but we took a conservative stance, assuming interest rates will remain steady for most of the year.

Yes. I mean, as you know, this is a highly competitive and fragmented market. There's lots of mom-and-pop companies, there's lots of midsize companies, there's lots of competitors in this space. Our historical win rates have always been good, and they continue to improve. I don't think we correlate it to anything but keeping our head down and focusing on what we can control. While we're navigating a challenging macro environment, we're doing exactly what we said we would do. We're consistently executing on our plans, we're winning deals, we're taking market share, we're innovating on our software and data strategies, we're delivering the synergies, and we're reducing debt. First Advantage is a great story to tell to customers and prospects. I've always felt this is a software and data story. The more we focus on AI and improving our candidate experience and client experiences through tech investments, that is going to drive increased win rates and higher retention. It has less to do with what's going on in the competitive space.

Our next question comes from Jeff Silber with BMO Capital Markets.

At your Investor Day, you talked a lot about the potential within the Digital Identity framework, I guess you can call it. I know you just alluded to it in your prepared remarks, but if you can give us a little bit more color in terms of what's been going on in the past couple of months, that would be great.

Yes, Jeff, we're not yet prepared to start talking about revenue and giving you some data on that. We will do that at some point in the future. It's still early days for Digital Identity, but it's the hottest topic in our space right now. We continue to win new Digital Identity deals. There's a lot of education happening in the space right now because clients are trying to understand it and what the solutions are. It takes up probably 50% of client communications and meetings now. We have a great offering, and we feel that First Advantage is in an attractive space in that we're not just a single solution provider. We sit in the middle of several potential digital identity offerings. Clients are starting to realize that, and that's why sales have been great in this space. However, we can't give you any metrics yet, but we will in the future once we get a better handle on trends and sales metrics.

All right, fair enough. If I could switch gears. You mentioned the impact of the One Big Beautiful Bill Act on your cash tax payments in the back half of the year. This tax bill was obviously very broad beyond just taxes. I'm just wondering, was there anything in there that you think could help your business over the long term, either positively or negatively?

Yes, Jeff, it's a great question. I think it's still probably too early to tell. I know there are still even pieces of the bill that are waiting for guidance and clarifications. There's the accelerated amortization of your R&D expenses, which is the immediate reaction from everyone. In terms of whether customers can leverage provisions to change how the market works over time, it's too early to understand because all the guidance rules aren't available yet, but we're keeping our eyes on it. For now, the primary impact for us is the cash in hand for 2025, supporting our deleveraging and possibly allowing us to make a couple more accelerated investments in the synergy program, giving us more options.

We will move next with Scott Wurtzel with Wolfe Research.

I wanted to ask about the Collaborate user conferences, particularly in new regions and while engaging with Sterling customers. Are you primarily focusing on educating them about the offerings available through First Advantage and the combined entity, or is the emphasis more on sales at this time?

Yes, Scott, we purposely do not make Collaborate a sales-focused event. That's why our customers love attending it. It's a chance for them to discuss industry trends, vertical trends, geography trends, and compliance trends. It's an opportunity for our product teams to spend time with our customers to ensure our products fit their needs. This way, it affects our future product roadmaps because we get to hear what they want, what they're looking for, and what their challenges are. Yes, there are sales opportunities at Collaborate, but that's not the intent of the event. The event is really to collaborate on what they're experiencing. It gives us a chance to get them together for several hours or, in the U.S., a couple of days to really spend time connecting.

We will move next with Harold Antor with Jefferies.

This is Harold Antor on for Stephanie Moore. I guess just one question for me. You're seeing, I guess, weaker base volumes than expected. So I guess just on the sales force, are you reducing your sales force given the slightly weaker demand that you're seeing? Or are you keeping all of the sales force from Sterling? Or are you building your sales force now to take advantage of the expected demand that comes along as this macro uncertainty clears out? Just anything there would be helpful.

Steven, you can cover the base aspect, and I’ll handle the sales team part. When looking at it, the base growth assumption is slightly lower, but our retention is expected to remain above 96%. We will continue serving 80,000 customers. It's not about losing customer units; rather, it's an anticipation of some macro impact on the volumes from those customers. There are no planned reductions in our account management team or any part of the commercial team at this time because we remain optimistic about our customers' future. Our pipeline for upsell and cross-sell opportunities is strong, and we aim to capitalize on that for future growth. We will still support all of our clients, and Scott will elaborate shortly, but our upsell and cross-sell pipeline appears solid, and we are not decreasing our efforts on the front end. I would say we're investing. We brought on a new Chief Marketing Officer, and we're investing in the front end in demand generation and branding, plus we brought on a new Chief Product and Tech Officer to pull this all together. Our strategy is focused on best-in-breed technology to the market. We have amazing talent and leadership in that space. We're very happy with the size of our sales force and its productivity. We're investing in building our sales force, and if anything, we're looking to make further investments.

I think a final point regarding the question is that we believe we still have a very scalable P&L. Even with a slightly softer base, the cost of sales are variable based on volume, allowing us to manage them effectively. We have considered this in our fulfillment plans for the second half of the year. This reflects our commitment to cost management and operational efficiency.

And remember, base does not equal revenue. Base is just one component of revenue. We had a growth of 1.5% this quarter. If you're growing year-on-year 1.5% in this challenging macro environment, you are not looking to cut; you are looking to invest.

I see no further questions in queue. Thank you all for joining us today and for your participation. This concludes the First Advantage Second Quarter 2025 Earnings Conference Call and Webcast. At this time, you may disconnect your line. Have a wonderful day.